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FM201 - Financial Institutions & Markets: Tutorial 9

This document contains sample questions from a tutorial on financial institutions and markets. It covers several topics: 1) Understanding the principle of "assets reprice before liabilities" and how it relates to interest rate risk measurement. 2) Defining the three groupings used in repricing gap analysis and how the use of different planning periods impacts the groupings. 3) Calculating the current repricing gap and the annual dollar impact of a 25 basis point interest rate increase using a bank's repricing gap report. 4) Calculating the duration of asset and liability portfolios and the value change of each from a 75 basis point interest rate increase. 5) Explaining why importers,

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58 views

FM201 - Financial Institutions & Markets: Tutorial 9

This document contains sample questions from a tutorial on financial institutions and markets. It covers several topics: 1) Understanding the principle of "assets reprice before liabilities" and how it relates to interest rate risk measurement. 2) Defining the three groupings used in repricing gap analysis and how the use of different planning periods impacts the groupings. 3) Calculating the current repricing gap and the annual dollar impact of a 25 basis point interest rate increase using a bank's repricing gap report. 4) Calculating the duration of asset and liability portfolios and the value change of each from a 75 basis point interest rate increase. 5) Explaining why importers,

Uploaded by

Sean Austin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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FM201 - Financial Institutions & Markets

Tutorial 9

Chapter 14
1. Understanding the re-pricing of financial assets and liabilities is essential in interest rate risk measurement
and management. Explain and discuss the basic principle of ‘assets re-priced before liabilities’ (ARBL). Use
examples to support your answer.
2. Re-pricing gap analysis requires the identification of the interest rate sensitivity of assets and liabilities,
within different planning periods, into three specific groupings.
a. Define and discuss the three groupings.
b. Explain why different planning periods are used and the impact of the different planning periods on the
grouping of assets and liabilities.
3. A regional bank uses re-pricing gap analysis as its main interest rate risk measurement tool. Each month, the
bank generates a report that categorises assets and liabilities by the interest rate sensitivity over a one-month
(30-days) planning period. The latest report is shown below:

Average Average
Assets $ billions yield (%) Liabilities $ billions yield (%)

Fixed-rate personal 15 8.15 Demand deposits 18 0.25


loans > 30 days

Variable-rate 48 8.50 Term deposits > 30 36 4.50


personal loans > days
30 days

Fixed-rate 8 9.95 Term deposits < 30 10 3.85


commercial days
loans < 30 days

Variable-rate 26 9.70 Certificates of deposit 12 4.15


commercial > 30 days
loans < 30 days

Treasury bonds > 10 4.25 Long-term debt 31 6.25


30 days securities (fixed)

Total 107 107

a. Calculate the current re-pricing gap.


b. If interest rates are forecast to increase by 25 basis points at the start of the one-month (30-days) planning
period, what will be the annualised dollar impact on the profitability of the bank?

Show all calculations.


FM201 - Financial Institutions & Markets
Tutorial 9

4. Listed below is a simplified balance sheet showing the dollar value and duration of assets and liabilities held.
For ease of calculation, we will assume an average interest rate of 6.00 per cent per annum; that is r = 0.06.

Assets $ millions Duration


Debentures 41 6.885
Euronotes 25 4.420
Government bonds 10 3.345
Total assets 76
Liabilities
Short-term commitments 25 1.485
Long-term debt issues 38 5.844
Total liabilities 63
Equity 13

a. Calculate the duration of the asset portfolio and the duration of the liability portfolio.
b. Calculate the value of the asset portfolio and the value of the liability portfolio if there is a general
increase in interest rates of 75 basis points.

Chapter 15
5. Importers, exporters, investors and borrowers may all be participants in the FX markets. Explain why each of
these parties would be involved in FX market transactions.
6. Distinguish between speculative and arbitrage transactions in the FX market.
7. Describe arbitrage transactions using an example of a triangular arbitrage.
8. Outline the features of the main types of contracts that are created in the FX markets, distinguishing between
short-dated, spot and forward transactions.
9. Using the context of the currency pair USD/JPY, explain the terms base currency, terms currency, direct
quotation and indirect quotation.
10. An FX dealer is quoting spot USD/SGD1.2750–56.
(a) Explain from the perspective of the dealer what the FX quote indicates.
(b) Transpose the quotation.
11. A Swiss manufacturer generates receipts in USD from its exports of chocolate to America. At the same time,
the company imports cocoa from Nigeria, incurring commitments in NGN (naira). Rates are quoted at:
FM201 - Financial Institutions & Markets
Tutorial 9

USD/NGN 162.2520-29
CHF/USD 1.1310-19
Calculate the CHF/NGN cross-rate.
12. A German importer has entered into a contract under which it will require payment in GBP in one month.
The company is concerned at its exposure to foreign exchange risk and decides to enter into a forward
exchange contract with its bank. Given the following (simplified) data, calculate the forward rate offered by
the bank.
EUR/GBP (spot): 0.8260–67
One-month German interest rate: 4.75% p.a.
One-month UK interest rate: 3.25% p.a.

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